Shale Oil Boom: A US Phenomenon

Huge but hostile resource: The role of drilling intensity

Oil is not in short supply. From a purely physical point of view, there are huge volumes of conventional and unconventional oils still to be developed, with no “peak-oil” in sight. The real problems concerning future oil production are above the surface, not beneath it, and relate to geopolitical decisions and instability.

The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades. It will trigger worldwide emulation over the next decades that might bear surprising results – given the fact that most shale/tight oil resources in the world are still unknown and untapped. The application of shale extraction key-technologies (horizontal drilling and hydraulic fracturing) to conventional oilfield could dramatically increase global oil production.

US currently produces approximately 8.1 mbd. The combined additional, unrestricted liquid production from the aggregate shale/tight oil formations could reach 6.6 mbd by 2020, in addition to another 1 mbd of new conventional production. However, there remain obstacles that could significantly reduce the U.S. shale output: among them, the inadequate U.S. oil transportation system, the country’s refining structure, the amount of associated natural gas produced with shale oil, and environmental doubts about hydraulic fracturing, one of the key technologies for extracting oil from shale. After considering risk factors and the depletion of currently producing oilfields, the U.S. could see its production capacity increase by 3.5 mbd. Thus, the U.S. could produce 11.6 mbd of crude oil and NGLs by 2020, making the country the second largest oil producer in the world after Saudi Arabia. Adding biofuels to this figure, the overall U.S. liquid capacity could exceed 13 mbd, representing about 65 percent of its current consumption.

The principal difficulty concerning shale gas is the effect of hydraulic fracturing on the environment, which is perceived as contributing to water and land contamination, natural gas infiltration into fresh water aquifers, poisoning of the subsoil because of the intensive use of chemicals, and even minor earthquakes. Even if those problems cannot be eliminated, after more than one million hydraulic fracturing operations in the United States since 1947 (hydraulic fracturing is not a new technology), the evidence shows that only a tiny percentage of these accidents occurred, and that they can be managed with appropriate best practices and adequate enforcement, rather than by over-regulating the activity.

It is worth noting that the U.S. shale revolution cannot be easily replicated in other areas of the world – at least in a short period of time – due not only to the huge resource base of shale/tight oil plays existing in the U.S., but also to some unique features of the U.S. oil industry and market, such as the private ownership of mineral rights, the presence of thousands independent companies – oftentimes small – that historically played the role of pioneering new high-risk, high-reward targets, the huge availability of drilling rigs and other exploration and production tools, a very active financial market that supply money for new ventures. With the exception of Canada, these key features are foreign to other parts of the world, and they make the U.S. and Canada a sort of unique arena of experimentation and innovation.

A revolution in environmental and emission-curbing technologies is required to sustain the development of most unconventional oils, along with strong enforcement of existing rules, to avoid a continuous clash between the industry and environmental groups that will force governments to delay or constrain the development of new projects.

On one hand, the large resource size – and the ability of the industry to develop it through steady improvements in technology and cost – dwarf earlier forecasts, suggesting the possibility that the United States may become the largest global oil producer in just a few years. On the other hand, the unique characteristics of shale oil – the drilling intensity in particular – make it extremely vulnerable to both price drops and environmental opposition in new and populated areas.

Drilling intensity is a key point in order to understand the real evolution of shale oil and gas activity in the United States and its possibility to rapidly adapt to shifting circumstances.

Given the early state of knowledge and technology, the U.S. shale oil boom is mostly a function of bringing as many wells as possible on line, due to the dramatic decline in production that follows the early months of activity with each new well. For example, by December 2012 it took about 90 new producing wells per month just to maintain North Dakota’s Bakken-Three Forks (the largest shale oil play so far in the United States) oil production of 770,000 barrels per day.

Drilling intensity in U.S. shale oil plays skyrocketed from a few hundred wells brought online (e.g., be- coming productive) before 2011 to more than 4,000 in 2012 – a figure that outpaces the total number of oil and gas wells (both conventional and unconventional) brought online in the same year for rest of the world (except Canada).

In the short- to medium-term (3 to 5 years), the correlation between drilling intensity and shale oil production will shape the evolution of U.S. oil production more than any other factor. And because drilling intensity is largely a function of the oil price, a significant dip in oil price may trigger a rapid twist in the shale oil boom.

Thecentral role played by drilling intensity in this early stage of shale oil and gas development has a crucial but almost unnoticed implication for the possibility of replicating the success of the American experience in other parts of the world. The United States concentrates in its territory 60 percent of the global availability of drilling rigs; moreover, 95 percent of U.S. drilling rigs can perform horizontal drilling that together with hydraulic fracturing or “fracking” is required to liberate shale resources. Combined with a relatively low population density in several shale areas, this vast supply is a key factor that allows the US to achieve such levels of drilling intensity. In 2012, for example, the United States completed 45,468 oil and gas wells (and brought online 28,354 of them) as against 3,921 wells completed in the rest of the world, except Canada.